Fears over the future of the Beatties department store in the centre of Birmingham surfaced last night after rival House of Fraser confirmed it could launch a takeover bid for the Wolverhampton-based retailer.
Analysts are already speculating that the store could shut.
In a brief joint statement to the London Stock Exchange, the two groups said they were in discussions about a possible offer by House of Fraser for Beatties' entire issued share capital. The statement added that talks were at an " advanced" stage, but that an offer was not certain.
The news saw shares in Beatties surge 21 per cent to 141p - a 20-month high - but observers believe House of Fraser may have to offer as much as 170p a share to gain control. That would value Beatties at about £70 million. If a takeover does go ahead it would mean House of Fraser and Beatties competing for customers within a few hundred yards of each other in Birmingham's Corporation Street.
Beatties, listed on the stock market under the name of its founder, James Beattie, has consistently remained committed to the future of its Birmingham store, where operating losses for the year to January rose from £1.6 million to £1.9 million.
Sales at the store have steadied since the nearby Bullring shopping centre opened its doors.
And in April Beattie's finance director, Bill Kelly, said the group was prepared to give the outlet the time it needed to trade profitably.
Yesterday, a spokeswoman for the group said it was too early to comment on the impact of any takeover - adding there was still no certainty that a deal would be completed.
Beatties also has sites in Solihull, Sutton Coldfield, Aylesbury, Birkenhead, Burton, Huddersfield, Northampton and Worcester.
Chief executive Brian Heilbron is currently conducting a review of the business and its merchandising strategy.
He is due to report back in the summer, but has already expanded its range of brands.
House of Fraser, which has about 50 UK outlets, owns the Rackhams and Army & Navy chains and has stores at locations including Nottingham, Reading, Edinburgh and Birmingham.
It recently opened new stores in Maidstone, Dublin and Croydon - its largest to date - and acquired Scotland's historic Jenners department stores for £14.1 million.
It said earlier this month that it was suffering from a slowdown in spending on big ticket household items.
The department store group said the continued slow sales at its home division contributed to same-store transaction value falling 3.2 per cent in the 19 weeks to June 11.
However, it sounded a more upbeat note as it told its annual meeting that a series of new store openings would strengthen the business and had boosted total sales.
The talks with Beatties come at a turbulent time for the department store sector.
Consolidation has become an attractive option as the small chains look to battle the increasingly dominant Bhs and Debenhams, and the main benefits for House of Fraser would be to boost its store network in central England and to gain access to Beattie's valuable real estate, analysts said.
KBC Peel Hunt said: "There are plenty of positives to be taken out of this deal that to our minds makes it all the more likely."
It suggested a top end take out valuation of 167p.
"Assuming ten per cent cost savings the acquisition itself could be 14.2 per cent earnings enhancing excluding the potential upside from exiting Beattie's loss-making Birmingham store in the first full year. With only one location - Birmingham - where the two groups trade head-to head, James Beattie is a good strategic fit for HoF."
Beatties' shares closed up 331/2p at 1491/2p.